Originally featured in Thinking Bigger Magazine - March 2015
As a small business owner, there may come a time, if it hasn’t already, when you need money and you need it now.
There are a variety of funding options available: banks, home equity, the SBA, friends and family, investors, accounts receivable factoring, credit cards—the list goes on and on.
However, what if you have exhausted all of those sources and still have a short-term need for cash? As you begin the quest to find financing, you may consider alternative funding—an option becoming increasingly popular for small businesses across the country.
Because the traditional banking system’s regulations have made it increasingly difficult, time-consuming and, in some cases, impossible for a small business to get quick funding from their bank, this niche financing industry has emerged, filling a need that many primary funding resources have overlooked.
What Exactly Is Alternative Funding?
Lending Club and Kabbage are two examples of companies providing alternative funding services. These, as well as other organizations in this niche, are primarily online resources focused on providing fast and flexible short-term financing to small businesses.
Typical lending ranges from $10,000 to $100,000. After the process has started, it usually takes about a day for the company to receive financing, assuming all the funding conditions have been met.
Kansas City is actually home to an alternative funder, CapFusion. Though the company provides funding to small businesses across the country, the company’s founders are based in Kansas City. And they may pay extra attention if they receive an application from a business that is located here, too.
Why Isn’t Everybody Using Alternative Funding?
There are pros and cons to all funding options, but the main cons associated with alternative funding include the associated costs, the dollar limits and the relative experience of the lender.
The costs of these loans can be significantly more than annualized rates associated with conventional financing. Using alternative funding, a typical transaction’s annualized interest expense is anywhere from 30 percent to 50 percent. Remember, there is a reason this niche is referred to as “alternative funding” and not primary funding.
Additionally, the players in this space typically lend in much lower dollar amounts than other types of financing. The thought behind this being, once a company has stabilized its cash flow and has time to patiently search for the best conventional financing arrangement, it will no longer need alternative financing.
Lastly, as a relatively new niche, many companies in this space are relatively young. Some small business owners simply may prefer working with more established, well-recognized institutions.
What You Should Do
As if running a business doesn’t present enough challenge to the small business owner, I’ll add one more. It is important to understand all the financing options available to you and the pros and cons before you make a decision. Put in the time and effort to analyze your alternative financing options, the same way you would research other goods and services.
While working with an online alternative funding source may be your best solution, make sure your needs align with the company’s capabilities, and make certain you are working with the lending company that will be providing the financing, versus a broker, which will lead to substantially more costs.
Learn more about the author of this article, Daniel Kjergaard and our Entrepreneurial Services Group.